SEC Moves Away From “Neither Admit Nor Deny" Settlement Policy: What’s Next?

The Securities and Exchange Commission (SEC) recently announced changes to its long-standing practice of settling cases on a “neither admit not deny basis.”

Under the terms of the SEC’s policy, defendants are not required to admit to the SEC’s allegations of wrongdoing in settlement agreements and consent judgments. However, they are also not allowed to deny the factual allegations that form the basis of the agency’s complaint.

Facing pressure to hold individuals and firms accountable for their misdeeds in the wake of the financial crisis, new SEC Chair Mary Jo White recently announced, “There may be particular individuals or institutions where it is very important it be a matter of public record that they acknowledge their wrongdoing, and if not you go to trial.”

While there has been no official policy announced, an internal SEC email to Enforcement Division staff further explained that while the SEC will continue to employ no-admit-no-deny settlements to resolve cases, “there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution.”

The correspondence noted that the new admissions requirement would be limited to certain types of cases, including:

• Misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm;
• Where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or
• When the defendant engaged in unlawful obstruction of the Commission’s investigative processes.

The new policy will undoubtedly have an impact on the SEC’s enforcement record. As highlighted in SEC testimony defending the policy in 2012, “There is little dispute that if ‘neither-admit-nor-deny’ settlements were eliminated, and cases could be resolved only if the defendant admitted the facts constituting the violation, or was found liable by a court or jury, there would be far fewer settlements, and much greater delay in resolving matters and bringing relief to harmed investors.”

Admissions can be particularly damning for regulated entities. For instance, an admission could preclude an individual or firm from challenging liability in a subsequent civil lawsuit. Moreover, an admission could also be used to prove criminal liability for the same violation. Given the risks, defendants are highly unlikely to settle, without some assurances that their admissions will not come back to haunt them.

If you have any questions about the new SEC policy or would like to discuss the legal issues involved, please contact me, Jay  Surgent, or the Scarinci Hollenbeck attorney with whom you work.